Israel-based Bank Leumi last week agreed to pay a total of $400 million to resolve charges that it conducted an illegal cross-border scheme to assist U.S. clients in evading federal and state taxes by hiding income and assets in offshore bank accounts in several countries around the world. 

Bank Leumi Group will pay a total of $270 million to the United States, and another $130 million to the New York State Department of Financial Services. Under the terms of the settlement, Bank Leumi will also install an independent monitor, selected by DFS, to conduct a comprehensive review of the bank’s compliance programs, policies, and procedures.

Bank Leumi also agreed to terminate and ban various senior operations, compliance, and legal staff who actively supported the misconduct. As one example, Bank Leumi USA banned its former chief compliance officer (currently chief administrative officer) from conducting any compliance-related activities. In 2008, Bank Leumi USA’s chief executive officer appointed a chief compliance officer who remained in this position until 2010, even though this individual had no compliance experience, according to DFS.

“Bank Leumi employees engaged in a series of egregious schemes—including creating complex, sham loan arrangements—to help its U.S. clients shirk their responsibility to pay taxes,” Benjamin Lawsky, Superintendent of Financial Services, said in a statement. “What’s worse, when certain Swiss banks began to put the brakes on this type of misconduct, Bank Leumi instead hit the accelerator even harder, viewing it as a ‘golden opportunity’ to pick up new business.”

For example, when the Department of Justice’s investigation of UBS became public in 2008, several senior executives at the bank considered UBS’s exit from the U.S. cross-border business as a “golden opportunity to contact customers” and urged bankers “to suggest [to prospective clients] that they transfer their accounts to here (the reasons are understood).” Subsequently, Bank Leumi-Israel and its foreign affiliates opened accounts for 263 U.S. taxpayers, increasing assets under management by approximately $401 million.

Tax Evasion Scheme

From at least 2000 through 2011, Bank Leumi-Israel and its subsidiaries, including Bank Leumi USA, a New York State-chartered bank, knowingly and willfully aided and assisted U.S. clients in opening and maintaining undeclared accounts in a foreign country, concealing their offshore assets and income from the Internal Revenue Service and other federal and state authorities, and filing false tax returns and other documents with such authorities.

Bank Leumi-Israel assisted U.S. clients in concealing accounts through, among other schemes:

“Hold mail” service for approximately 2,450 U.S. accounts, whereby every statement of account, notice, or other document associated with the account would be held abroad at the foreign bank and would not be sent to the customer’s address in the United States;

"Assumed name" and "numbered" accounts, in which the name of the account holder did not appear on any correspondence or account statements, and the bank would accept wire transfers using these assumed names or numbers in lieu of actual customer names;

Referring U.S. clients to outside lawyers and consultants who would establish and maintain offshore corporations in jurisdictions like the British Virgin Islands, Panama, and Belize, to nominally hold the undeclared accounts and hide their true tax status from U.S. authorities; and

Suggesting to U.S. clients to open accounts through Bank Leumi Trust in order to add an “extra level of secrecy” to the account.

In an effort to facilitate this tax evasion scheme, Bank Leumi offered several products to U.S. clients who maintained funds in undeclared accounts abroad, which enabled the customers to gain access to the funds without repatriating the funds or creating a paper trail that would disclose the existence of the undeclared accounts to the U.S. authorities.

More to Come

In addition to the settlement reached with DFS, the Bank Leumi Group entered into a deferred prosecution agreement with the Department of Justice, filed Dec. 22 in the Central District of California.  “This unprecedented agreement marks the first time an Israeli bank has admitted to such criminal conduct, which spanned over a 10-year period and included an array of services and products designed to keep U.S. taxpayer accounts concealed at Bank Leumi Group’s locations in Israel, Switzerland, Luxembourg, and the United States,” the Department of Justice stated.

This DPA is “yet another historical event in the international tax arena,” IRS Commissioner John Koskinen said in a statement.  “IRS will not tolerate the use of offshore accounts to illegally escape paying taxes and we will continue to focus on this priority area.”

In a statement, the Tax Division’s Acting Deputy Assistant Attorney General Larry Wszalek said the Bank Leumi Group’s admission of guilt “represents the Department of Justice’s next step in its worldwide efforts to hold banks and other financial institutions responsible for their criminal conduct.

“Those institutions that have engaged, or continue to engage, in conduct similar to that of Bank Leumi Group are well advised that the Tax Division will continue to extend its global reach in enforcing this nation’s criminal tax laws,” Wszalek added.

As part of its agreement with the Justice Department, the Bank Leumi Group provided the names of more than 1,500 of its U.S. account holders. The Bank Leumi Group will continue to disclose information to the government regarding its cross-border business and provide testimony and information regarding other investigations.